Goodwill

Changes in goodwill by reportable segment were as follows:



	U.S. dialysis and related lab services			DMG			Other-ancillary services and strategic initiatives			Consolidated total
Balance at January 1, 2016	$	5,629,183		$	3,398,264		$	267,032		$	9,294,479
Acquisitions	75,295			248,901			123,632			447,828
Divestitures	(12,891		)	(2,223		)	(29,645		)	(44,759		)
Goodwill impairment charges	—			(253,000		)	(28,415		)	(281,415		)
Foreign currency and other adjustments	—			—			(8,816		)	(8,816		)
Balance at December 31, 2016	$	5,691,587		$	3,391,942		$	323,788		$	9,407,317
Acquisitions	441,486			132,778			113,611			687,875
Divestitures	(32,260		)	(29		)	(54		)	(32,343		)
Goodwill impairment charges	—			(651,659		)	(34,696		)	(686,355		)
Foreign currency and other adjustments	—			—			39,383			39,383
Balance at September 30, 2017	$	6,100,813		$	2,873,032		$	442,032		$	9,415,877

Balance at September 30, 2017:
Goodwill	$	6,100,813		$	3,966,460		$	511,052		$	10,578,325
Accumulated impairment charges	—			(1,093,428		)	(69,020		)	(1,162,448		)
	$	6,100,813		$	2,873,032		$	442,032		$	9,415,877

The Company elected to early adopt ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment effective January 1, 2017. The amendments in this ASU simplify the test for goodwill impairment by eliminating the second step in the assessment. All goodwill impairment tests performed during 2017 have been performed under this new guidance.

Each of the Company’s operating segments described in Note 18 to these condensed consolidated financial statements represents an individual reporting unit for goodwill impairment testing purposes, except that each sovereign jurisdiction within the Company’s international operating segments is considered a separate reporting unit.

Within the U.S. dialysis and related lab services operating segment, the Company considers each of its dialysis centers to constitute an individual business for which discrete financial information is available. However, since these dialysis centers have similar operating and economic characteristics, and the allocation of resources and significant investment decisions concerning these businesses are highly centralized and the benefits broadly distributed, the Company has aggregated these centers and deemed them to constitute a single reporting unit.

The Company has applied a similar aggregation to the DMG operations in each region, to the vascular access service centers in its vascular access reporting unit, to the physician practices in its physician services and direct primary care reporting units, and to the dialysis centers within each international reporting unit. For the Company’s other operating segments, discrete business components below the operating segment level constitute individual reporting units.

Based on continuing developments at the Company’s DMG reporting units during the third quarter of 2017, the Company performed impairment assessments for all of its DMG reporting units.

As a result of these assessments, the Company recognized goodwill impairment charges as shown and discussed below:



	Three months ended				Nine months ended
Reporting unit	September 30, 2017		September 30, 2016		September 30, 2017		September 30, 2016
DMG California	$	560,756	$	—	$	560,756	$	—
DMG Florida	26,324		—		76,270		91,200
DMG New Mexico	13,960		—		14,633		—
DMG Nevada	—		—		—		161,800
Vascular access	—		—		34,696		—
Total	$	601,040	$	—	$	686,355	$	253,000

The goodwill impairment charges recognized during the three months ended September 30, 2017 resulted primarily from reimbursement pressures, continuing increases in medical costs, and other market factors.

Pursuant to further evaluation of this business during the third quarter including the preparation of these interim consolidated financial statements, the Company determined that commercial membership is expected to be lower than previously expected due to increased reimbursement pressure, Medicaid reimbursement rates are expected to trend lower within the state of California, and the gap between Medicare rate increases and medical cost increases is likely to persist. Accordingly, management has revised its expectations for certain DMG reporting units. The Company has identified opportunities to mitigate the effects of some of these challenges and is continuing to evaluate its strategic alternatives concerning the DMG business, but the timing and likelihood of such changes remain uncertain.

The goodwill impairment charge recognized at the Company’s DMG California reporting unit includes a $218,134 increase to the goodwill impairment charge, and reduction to deferred tax expense, for the deferred tax assets that the impairment itself generates. As such, the effect of this is a $601,040 charge to operating (loss) income and a $218,134 credit to tax expense, for a net $382,906 impact on net (loss) income. For the Company’s DMG reporting units, this recursive deferred tax effect is unique to DMG California and arises because this component of the DMG business was acquired by the Company in a taxable transaction for which goodwill is amortized for tax purposes.

During 2017, the Company also recognized goodwill impairment charges at its DMG Florida and DMG New Mexico reporting units during the three months ended June 30, 2017. These charges resulted primarily from changes in expectations concerning government reimbursement, including the effect of Medicare Advantage final benchmark payment rates for 2018 announced on April 3, 2017 and the Company’s expected ability to mitigate them, as well as medical cost and utilization trends.

The goodwill impairment charge recognized at the Company's vascular access reporting unit during the nine months ended September 30, 2017 resulted primarily from continuing changes in the Company’s outlook as the Company’s partners and operators continued to evaluate and make decisions concerning changes in operations, including termination of their management services agreements and center closures as a result of the Centers for Medicare and Medicaid Services (CMS) 2017 Physician Fee Schedule Final Rule and the Ambulatory Surgical Center Payment Final Rule released November 2, 2016, which introduced significant changes in reimbursement structure for this business unit. There is no goodwill remaining at the Company's vascular access reporting unit.

During the nine months ended September 30, 2016, the Company recognized goodwill impairment charges at its DMG Florida and DMG Nevada reporting units. These charges resulted primarily from changes in expectations concerning government reimbursement and the Company’s expected ability to mitigate them, as well as medical cost trends and other market conditions.

Further reductions in reimbursement rates, increases in medical cost or utilization trends, or other significant adverse changes in expected future cash flows or valuation assumptions could result in goodwill impairment charges in the future for the following reporting units, which remain at risk of goodwill impairment as of September 30, 2017:



	Goodwill balance as of September 30, 2017		Carrying amount coverage⁽¹⁾		Sensitivities
Reporting unit	Goodwill balance as of September 30, 2017		Carrying amount coverage⁽¹⁾		Operating income⁽²⁾		Discount rate⁽³⁾
DMG California	$	1,888,609	—	%	(3.0	)%	(5.8	)%
DMG Florida	$	378,071	—	%	(0.9	)%	(3.3	)%
DMG New Mexico	$	56,293	—	%	(1.1	)%	(2.1	)%
DMG Washington	$	247,552	17.1	%	(1.7	)%	(3.4	)%


(1)	Excess of estimated fair value of the reporting unit over its carrying amount as of the latest assessment date.


(2)	Potential impact on estimated fair value of a sustained, long-term reduction of 3% in operating income as of the latest assessment date.


(3)	Potential impact on estimated fair value of an increase in discount rates of 100 basis points as of the latest assessment date.

Except as described above, none of the Company's various other reporting units were considered at risk of goodwill impairment as of September 30, 2017. Since the dates of their last annual goodwill impairment tests, there have been certain developments, events, changes in operating performance and other changes in key circumstances that have affected these other businesses. However, except as further described above, these changes did not cause management to believe it is more likely than not that the fair value of any of its reporting units would be less than their respective carrying amounts.